Good day everyone, and welcome to our weekly position update.

What a week it has been, with many investors which have been patiently waiting for this week to finish before finally stepping back into the markets following the U.S. elections.

Ladies and gentlemen, we have a winner: Donald Trump will be the next President of the United States, bringing with him what appears to be a near-certain Republican sweep. While we anticipated a surge of activity post-election, market participants have remained cautious over this week, leaving some money on the sidelines. This is understandable given that we’ve probably seen one of the busiest economic and political weeks in history. 

For large-scale money managers, it makes sense to pause and digest the events of the past few days before making any significant moves. We believe that the flow in the coming weeks will be crucial in revealing where institutional money is headed. Stay tuned.

To close out this week, here’s a key chart that encapsulates recent market dynamics. Both the VIX and the MOVE Index have dropped significantly today following a turbulent week of uncertainty. 

The essence is simple: as market participants unwind their hedging positions amid calmer conditions, it opens the door for investors to take on more risk. We anticipate this trend to continue into next week, with substantial capital flows expected. While the reassurances from the Fed and the BoE about recent yield movements not being a cause for concern offer some relief, it’s wise to remain cautious. This narrative suggests a more complex outlook for bonds and FX compared to equities in the near term. For now, the market seems content to take a breather and celebrate the week’s close—but keeping a close watch on these spreads in the coming weeks remains crucial.         

Chart 1.a: Volatility Reset – A Prime Opportunity to Add Risk

Equities: Buying the Rumor, Selling the News

Following the significant market reaction in equities post-U.S. election, with the Russell 2000 surging approximately 6% in a single day, our positioning metrics indicate a slight decrease in net long exposure. This suggests that traders who had positioned themselves for a Trump victory likely used the event as an opportunity to lock in profits. Additionally, many managed funds had squared their positions ahead of what was expected to be a highly volatile week, which likely contributed to the lack of a dramatic short squeeze.

Examining individual sectors, the pattern we highlighted last week—suggesting a Harris win could benefit tech—appears to be playing out, as Information Technology and Communications sectors notably underperformed relative to Materials and Industrials, which are also large subcomponents of the Russell 2000. We also observed a familiar trend from 2016, with bank stocks outperforming on expectations that a Trump administration would reduce regulations on the banking sector.

Chart 2.a: Equity Indices Positioning Overview

Chart 2.b: Equity Sectors Positioning Overview

Commodities

On the Gold Front

We are currently observing a shift in investment flows from gold to higher-beta assets such as cryptocurrencies and equities. Ahead of the U.S. presidential election, gold prices climbed amidst elevated volatility in bond and FX markets, driven by fears of potential election delays and social unrest. However, as the prospect of a Trump victory gained traction, gold reverted to its traditional inverse relationship with rising yields. This suggests that investors are pivoting away from gold—a classic safe-haven asset—in anticipation of higher yields under a Trump administration. With gold being a heavily crowded trade for some time, the recent selloff was likely exacerbated by delta hedging activity as the USD moved hardly after the election result. 

On the China Front 

This week saw a significant selloff in metals such as silver, copper, aluminum, and nickel, driven by two primary factors. First, hopes for new stimulus measures from China went unmet, making the week relatively uneventful in this regard. Second, a Trump victory is broadly seen as negative for China. Despite rumors last week hinting that a Trump win could lead to increased stimulus, China once again fell short of expectations. 

While there was no communication from the NPC, reports emerged that President Xi congratulated Donald Trump on his victory, with speculation of a phone call between the two leaders. This stands in stark contrast to Xi’s delayed recognition of President Joe Biden’s 2020 win. China appears increasingly willing to engage in negotiations, likely to avoid the potential imposition of a 60% tariff on all Chinese goods—a measure that UBS estimates could shave 2.5% off China’s GDP. With China’s economic situation appearing strained and Trump aware that he holds a strategic advantage, traders are quite downbeat on China at the moment. 

Chart 3.a: Commodities Positioning Overview

FX

The dollar squeeze led to pressure on several FX pairs. A key highlight in the FX market has been the buildup of short positions in MXN, CNH, and CNY, which performed exceptionally well following the elections. In today’s market, it appears that the squeeze is unwinding, with most pairs now trading past their pre-election thresholds.

The spread between EM and G7 volatility has contracted considerably, a trend that could continue into next week. This narrowing serves as a proxy for why overall market volatility is receding, encouraging investors to cautiously re-enter the market. This shift has contributed to bonds finding renewed interest following a turbulent week. Looking ahead, the tightening of the EM vs. DM volatility spread may act as a supportive tailwind for bonds, thus weaker dollar. 

Chart 4.a: FX Positioning Overview

Chart 4.b: Volatility Takes Another Breather

Chart 4.c: FX Implied Volatility Dashboard

Rate markets

In the fixed income space, markets appear to be leaning toward expectations of a more ‘hawkish’ stance from both the BoE and the Fed. Meanwhile, the stretched Euribor positioning indicates that the ECB is perceived as the most dovish among the three central banks. However, it’s important to note that being long Euribor may also reflect spread trades designed to capture the divergence between the Fed and BoE versus the ECB.

We anticipate increased activity in fixed income flows, particularly if bond market volatility continues to decline into next week. This could bolster demand for U.S. and U.K. treasuries, potentially prompting traders to unwind their ‘long Europe, short the rest’ spread trades, which currently appear overextended. However, with global term premia approaching concerning levels, there remains a possibility that central banks may intervene, adding another layer of complexity to market expectations.

The critical question is how a potential resurgence in bond and FX volatility, along with rising term premia, might spill over into equities and intangible assets such as cryptocurrencies. This remains uncertain for now. Monitoring volatility next week will be key in assessing whether the bid in the bond market should be met with caution. This stands as the primary global headwind against what is otherwise a broadly positive outlook.

Chart 5.a: Rates Positioning Overview

Chart 5.b: Global bonds Positioning Overview